A Primer on Real Estate Investing
This article is posted under Investing.
An OFW friend of mine is thinking of buying a brand new condo unit as an investment.
I immediately told him that he shouldn’t and it’s a BIG mistake.
He fell silent, and I knew I had to explain why I think it was a bad idea.
Below is a summary of what I told him – my personal primer on real estate investing.
And I hope that this can help you get more clarity and a better understanding on how to invest in real estate properties, specially in the Philippines. This post is dedicated to all my OFW readers.
WHAT IS AN INVESTMENT?
There are many definitions of the word investment; but for me, an investment is something that has potential to make money for you.
More importantly, whenever you “buy something as an investment” – even before you take out a single centavo from your pocket – you should already know how that investment will give you income.
Going back to my friend, I asked him, “What are you planning to do with the condo unit?”
“It will be a place where I can stay whenever I’m in the country,” he replied.
“And what happens while you’re working overseas?” I asked.
“My sister can stay there perhaps, or I can have it rented out,” he answered.
“If someone’s renting the unit, and you decided to come home. Are you going to evict the tenant so you’ll have a place to stay?” I asked, challenging his line of thought.
He fell silent again, and began to realize what I’m trying to make him understand.
MAKING MONEY FROM REAL ESTATE INVESTMENTS
There are three basic ways to make money from real estate investments:
- By leveraging on the property’s equity
- By selling the property
- By having the property rented out
If you’re not planning to do any one of these three, then you’re not buying the property as an investment.
Or in other words, if you (or your family) will be living in the property – then it’s NOT an investment – at best, it will be “a testament of your hard work”.
LEVERAGING ON EQUITY
Buying a property increases your net worth. And when the price of that property increases, then your net worth also increases. This is more commonly known as portfolio income.
However, this income is just on paper – and it’s practically “useless” unless you cash it out (by selling it) or you leverage the gain in equity.
How do you do this? There are many ways, and one example is leveraging the property as collateral to secure a loan to start a business.
Some savvy real estate investors refinance the same property to get some cash out, and then use that money to buy another property.
How exactly that happens is another story, and worth a separate blog post, but I hope you understand what I’m trying to say here for now.
SELLING THE PROPERTY
How do you buy and sell real estate for profit?
The Wrong Way: Buy a property. Wait for it’s value to appreciate. Sell.
This is wrong because your money will be tied up for many years before you can realize some income. It is for the same reason why I personally think it’s not a good idea to buy condo units at preselling as an investment.
The Correct Way: Buy an existing property that’s below market value. Sell it at a higher price, but still at below market value.
Someone I know bought a bank foreclosed property selling at 60% below market value. After 2 weeks, he sold it to someone at 80% below market value.
A win-win situation for both him and the buyer if you think about it – and he came out P200,000 richer. How he was able to do that is again, another story and worth a separate blog post; but I know you get the idea.
Another Right Way: Buy an existing property. Fix or repair it to increase its value. Sell it at a higher price.
This is also a good way to make money from “flipping” real estate; even better if you can buy the existing property at below market price.
RENTING OUT THE PROPERTY
If you prefer passive income, then renting out your property is a good option to take. However, remember that this is not as easy as it sounds. You need to know how to:
Spot a good rental property. Remember that real estate is all about location, location, location!
Properly screen tenants. You need to avoid problematic non-payers and trouble-makers. You’re not Big Brother and evicting tenants will not be as easy.
Be competent in property management and maintenance. It’s not just about collecting rent every month! There are laws that you need to learn and follow.
Investing in real estate is not just a rich man’s game – everyone can do it; that’s the good news!
But just like any investment, you need to learn and know exactly what you are going into. You need to have your investment objectives defined, and you need to have a clear plan on how you will achieve them.
Many have already achieved financial freedom through real estate investing. And you can too – if you are willing to focus, learn, be patient and work hard.
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